PLO Secretary-General Saeb Erekat issued a statement on Thursday decrying the US move. He said: "it has nothing to do with efficiency and a lot to do with pleasing an ideological US team that is willing to disband the foundations of (the) international system."

For years, the consulate has served as a de facto embassy to the Palestinians, reporting straight to the Department of State in Washington.

Placing it under the authority of the embassy could be seen as American recognition of Israeli control over the occupied West Bank and East Jerusalem.

In a statement, US Secretary of State Mike Pompeo said: "We will continue to conduct a full range of reporting, outreach, and programming in the West Bank and Gaza, as well as with Palestinians in Jerusalem through a new Palestinian Affairs Unit inside the US Embassy Jerusalem."

Palestinian officials cut ties with the US after President Donald Trump recognised Jerusalem as Israel's capital last year and moved the American embassy to the city.

The status of Jerusalem - home to sites holy to Muslims, Jews and Christians -is one of the core issues in the Israeli-Palestinian conflict.

After occupying the city's eastern part in the 1967 War, Israel unilaterally annexed the territory and proclaimed it as its capital. The Palestinians, however, see the city as the capital of their future state.

"The Trump Administration is making clear that it is working together with the Israeli government to impose Greater Israel with no Palestinian sovereignty," Erekat said

The Palestinian official promised that the Palestinians will take necessary steps in response to the US move.

"The Trump administration is part of the problem, not part of the solution," he said

Ahmad Tibi, the Palestinian member of the Israeli Knesset described the US move as "a negative development", calling it an insistence by the US administration to undermine Palestinian national rights.

He said the US has effectively killed the two-state solution that envisioned an independent Palestinian state in the occupied West Bank and Gaza alongside Israel.